From Plan to Market, From Regime Change to Sustained Growth in Central and Eastern Europe * After the state socalism collapsed in Central and Eastern Europe in the early 1990s, the Washington consensus of 1989 (a broadly accepted set of criteria for a reform program) was adopted as a blueprint for the process of transformation. * Central elements:
* Macro-economic stabilization (for countries with significant inflation and indebtedness) * New institutions
* Price and trade liberalisation
* Radical privatization
* Most of the “transformatology“ literature is based on the assumption that the elimination of deformed non-market economies, a restoration of market, and private ownership, paired with a laissez-faire free market system would automatically solve all major economic/social problems of the transforming countries. * The economic crisis within the Central and Eastern Europe area started much earlier – in the mid-late 1970s when growth slowed significantly and the terms of trade for the state socialist countries began to deteriorate (1973 first oil shock 20% decline, for some even 26-32%) Schumpeter’s theory of “structural crisis”: advancements in technology lead to decline of the old leading sectors and export branches based on old technology, generating wide-ranging slow-down and decline and causing an economic crisis even in rich, advanced countries. However, although rising new technology led to the emergence of new industries, new leading export sectors and an impressive new boom in the US and other advanced countries, the Central and Eastern Europe countries experienced a “peripheral structural crisis” – they suffered all the negative consequences of a the “structural crisis” but due to not having sufficient resources for R&D, know-how and financial sources, they were not able to take advantage of the technological development. After 1989, when the countries of the region lost the protection from Comecon’s isolation and regional self-sufficiency, they were forced to enter the world market and compete with the advanced countries (already adjusted to new technology) and also on their own opened domestic market. Consequence: the peripheral structural which had prolonged since 1973 continued and worsened during the 1990s. Also contributing to the economic crisis: serious macro-economic policy errors e.g excessive devaluation of the currency; too abrupt opening to trade with the West; and the failure in government management of the state sector * Foreign trade deficits increased dramatically and nearly all countries in the region dropped into an indebtedness trap – debt service consumed about 40-75% of the countries’ hard income and quite a few started to lose control over inflation * Economic policy during the transition:
* Change was too fast countries of transformation should not have attempted to jump directly from a centrally planned to a laissez-fair economy and from an entirely state-owned to a 100% privatized economy * State regulations and government policy were needed self-regulating mechanisms were not yet developed, market imperfections and non-market friendly behaviour were present * Suggestion (Kolodko) : A regulated market, instead of a self-regulation market, a mixed economy with a restructured and efficient state-owned sector for at least a period of time, and a “fine mixture between market and stae” would have been a more natural transition from plan to market * However, this approach was not adopted and led to a collapse of many old companies (lost a bulk of their value and had to be sold for a fraction of their previous value) mass unemployment, sharp decline in living standards (especially for vulnerable layers of society) * Outcome:
* Industry recovered only in two countries – Poland and Hungary * Some experienced a new crisis – Bulgaria and Romania * Russia and...
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